TIRESIAS’ GIFT OF FORESIGHT: DETECTING FIRMS IN DISTRESS

Abstract

The 2020 pandemic has accelerated bankruptcy in economic sectors directly affected by the evolution of prices (the oil industry, transportation, entertainment, the car industry etc). Thus, the number of distressed businesses has grown. The current paper aims to answer the following legitimate questions: what are the methods to early detect distressed businesses, and what are the paths that one can use in order to warn them of imminent distress? According to the European Commission, a company is distressed if, in the absence of State intervention, it will shut down its short-term or middle-term operations. The use of a multitude of definitions for financial distress is explained through the failure to find a measure of enterprise decline. Each country uses different terms to describe insolvency. Still, a model is necessary to improve the accuracy of the prediction. Liquidity flows, profitability and the leverage effect are the most useful indicators to predict a business’ insolvency, along with: assessment of accounting documents, liquidity rates, changes in legislation etc. Certain steps have been taken to elaborate some innovative methods based on data and Artificial Intelligence. In the EU, there are three warning tendencies: the extra-judiciary tendency, the mixed tendency and the non-litigious judiciary tendency.

Keywords

• companies in distress
• insolvency
• early warning